STANDARDIZATION AND INNOVATION IN CORPORATE CONTRACTING (OR THE ECONOMICS OF BOILERPLATE)

This Article presents a theoretical, institutional, and empirical anal ysis of how increasing returns-specifically, learning externalities an d network externalities--influence standardization, customization, and innovation in corporate contracts. In the theoretical section, we ana lyze how common use of a contract term can create learning and network externalities; how these externalities can influence the balance of s tandardization, customization, and innovation in contracts and how suc h externalities can lead to suboptimal contract provisions. We also di scuss how internal learning and network effects can result in switchin g costs. Finally, we examine how underwriters and law firms may amelio rate potential adverse effects of learning and network externalities. In the empirical section, we analyze the evolution of event risk coven ants, commonly included in bond indentures in the late 1980s. We find moderate to strong support for the hypotheses that learning or network externalities as well as switching costs were present in these covena nts and that underwriters significantly influenced firms' contracting choices.